Subhiksha was a retail outlet launched by R. Subramanian, an alumnus of the Indian Institute of Management (IIM), Ahmedabad, and the Indian Institute of Technology (IIT), Chennai, with its first store at Thiruvanmiyur in Chennai and an investment of around `4–5 crores in 1997. Subramanian also planned to invest `500 crores to increase the number of outlets to 2,000 across the country by 2009.
Ram Chandra Agarwal had set up Vishal Garments Store in 1994—three years before Biyani’s Pantaloon and seven years before setting up Vishal Retail. Both of them are discount stores at prices that are much lower than those offered by other retail outlets.
Subhiksha had to necessarily come up with innovative concepts in retail because of its wellestablished predecessors who were already doing well in the market. To come up with a unique value proposition, Subhiksha did an extensive research on customer behaviour and found that offering branded goods at a lower price than their competitors could make a breakthrough to have a competitive advantage. Subhiksha Trading Services Ltd owns and operates a chain of retail discount departmental stores and pharmacies. The company offers mobile equipment, groceries, drugs and pharmaceuticals, and consumer products. R. Subramanian was clear that tough competition and long-term survival would require him to be different and at the top in the years to come. Therefore, he started with a theme concept ‘why pay more when you can get it for less at Subhiksha.’ To achieve his objective, he deliberately operated upon a cost-cutting strategy by opening a chain of stores without comforts in terms of air-conditioning, fancy lights and touchand-feel experience. One may have to remember the Indian customer psyche, which enjoys shopping by touching and twisting the product in multiple ways. He also ensured that shops are not located on main roads costing relatively higher per square foot, but a bit inside to derive advantage in terms of rentals.
Subhiksha expanded its outlets fast within the given strategy. The numbers increased from 14 stores in 1999 to 50 stores by June 2000. By 2002, it had around 130 stores in the state of Tamil Nadu, from where it started its journey. After due market research for the future prospects of retail business, they decided in 2004–05 to open around 400 stores in Gujarat, Delhi, Mumbai, Andhra and Karnataka. Subsequent expansion plans ultimately resulted in their having around 1,600 stores across more than 100 cities selling food, groceries, drugs and telecom products across the country. This expansion could be achieved with the support of infusion of private equity capital by I-venture, the venture capital arm of ICICI. I-Venture took 24 per cent stake in the company’s equity, which until then was primarily held by Subramanian and his associates.
Subhiksha was planning to go in for an Initial Public Offering (IPO) in 2007 but shelved it in view of ‘uncertain market conditions’. Maybe, if issues had come, they would have given some respite to the company in terms of capital to manage financial crisis.
Subramanian never thought and dreamt too big when he started off with Subhiksha—a retail value chain in 1997. In fact, he never thought of entering into retail business when he passed out from IIM Ahmadabad in 1989. After spending a very short period with Citibank as an employee, he joined Enfield Industries. He could strategically contribute a great deal in professionalizing a family-run Enfield and could facilitate its takeover by Eicher. He had an entrepreneurial instinct, which led him to start his own venture called Vishwapriya after spending two years at Eicher. This venture enabled him to earn good profits to the tune of `25 crores before the share market collapsed in 1995.
The company grew by leaps and bounds, as was evident from the increase in its turnover from `330 crores in 2005–06 to `833 crores in 2006–07, and then to `2,305 crores in 2007–08, that is, around seven times increase in two years. Similarly, its number of stores grew from 150 in September 2006 in Tamil Nadu to around 1,600-odd stores across the country by September 2008. It had plans to further increase the turnover to `4,300 crores by March 2009. It is important to remember that such an accelerated growth in turnover took place with a small net worth base of `250 crores having an equity component of `180 crores. A face value of equity of `32 crores was held by promoters, including Subramanian 59 per cent, ICICI Ventures 3 per cent, ICICI Prudential Mutual Fund 5 per cent, IT czar Azim Premji 10 per cent and the balance by an employees’ trust.
Azim Premji, a well-known Indian business man, who had invested in Subhiksha through his private investment vehicle only a few months before its downfall in March 2010 had said that Subhiksha was the retail equivalent of Satyam—India’s largest corporate fraud. He said, ‘There was an overstatement of accounts, fake inventory, fake bills, fake companies that money was transferred to.’
Inventory management and having a system in place to provide continuous information on logistics and supply chain management matter the most for a retail chain. The company had problems in managing its front-end and supply chain operations using its existing local enterprise resource solution (ERP). The company also needed a good solution to manage the payroll system. Although it did not have any HR issues at the ground level, sending the payroll to employees on time was becoming more and more difficult.
Although the company had deployed the ERP system, it could not derive the required value from it to respond to the challenges of accelerated growth that took place in a short period. Another drawback that Subhiksha had was lack of dedicated people and cash management, which matters the most in such ventures.
As a result of problems on multiple fronts, Subhiksha faced an ultimate problem of being out of cash in late 2008, which jeopardized its operations and brought it to a standstill. The company faced a severe cash crunch, which resulted in defaults on its loans, vendor payments and staff salaries. Ultimately, the situation got precipitated to a level of closure of its stores. The cash crunch was so deep that it resulted in television channels propagating for not clearing advertising dues to the tune of ` 8 crores, defaults in payment towards goods—` 35 crores, wages—` 20 crores, lease rentals—` 20 crores and, above all, loans from different sources to the tune of ` 700 crores at an average rate of interest of around 12 per cent. Many suppliers stopped supplying to them in the wake of their financial crisis and uncertainty for getting their payments. Above all, lack of team spirit to face the crisis and lack of human resources policies led to exodus of talent from the company.
ICICI Venture Funds Management Co. Ltd has been struggling to find a buyer for Subhiksha Trading Services Ltd even after seven months when the corporate debt restructuring (CDR) plan for Subhiksha hit a dead end, according to a person familiar with the development. ICICI Venture, which has a 23 per cent stake in Subhiksha, has been unable to find buyers for its stake and feels that Subhiksha cannot be revived. ‘The investment is already written off in a way. Its equity value has eroded,’ this person added, who wished to remain anonymous. ‘The firm can’t be revived now.’ ICICI Venture has the largest non-promoter stake in Subhiksha, but a senior executive at a consulting company said that the private equity (PE) firm would not face any loss from writing off its investment. ‘ICICI Venture rather made profit on (its) investment while selling 10 per cent stake to PremjiInvest,’ the consulting company executive said, requesting anonymity for himself and his firm citing business relations with ICICI. The person familiar with the matter said that ICICI Venture had approached strategic buyers to acquire the chain, but failed. ‘Buyers looked at the company on behest of ICICI Venture, but nothing worked out as they saw no value in buying it.’ A spokesperson for ICICI Venture said in an email reply that the firm ‘would prefer not to comment on the issue’, Mint reported. R. Subramanian, Subhiksha’s Managing Director, did not respond to an email seeking comment sent on 16 March. He did not answer phone calls or reply to text messages.2
1. Was it right on the part of the company not to come up with an IPO in 2007? Justify your answer.
2. Comment critically on the promoter team and their expertise and experience in managing the retail business.
3. What has been the root cause behind the failure of Subhiksha?
4. In case you were managing the venture, what precautions would you take to ensure that the situation does not precipitate to a closure level.
5. What have been the key lessons that can be learnt from the Subhiksha example to manage entrepreneurial ventures?
6. Many businesses fail because of lack of focus in their approach towards business.
Infosys, for example, has been highly focused on its business profile. Do you think in a retail chain such as Subhiksha, it would be desirable for the company to adopt a focused approach? If so, what strategy would you suggest and why?